As Investors Flee, Russia Inc. Is Feeling the Pain
Want to know how President Vladimir Putin’s showdown with the West is affecting Russian business? Ask retailer Detsky Mir.
Detsky Mir (Children’s World), which started as a Soviet-style department store across from KGB headquarters in Moscow, rode demand from a growing middle class over the past two decades to become a $1.1 billion-a-year company. It now has more than 200 stores selling children’s clothing and toys in dozens of Russian cities. Last fall it announced plans for an initial public offering on the London Stock Exchange early in 2014.
Then came Putin’s grab for Crimea, and now Detsky Mir has put the IPO on hold, according to a person with direct knowledge of the situation. “In these conditions [the company] will not do anything,” the person said.
Detsky Mir isn’t alone. Even as Europe and the U.S. have refrained from imposing all-out economic sanctions, Russian companies are suffering as investors flee the country. Canceled IPOs, suspended loan negotiations, plummeting share prices—all are part of an estimated $50 billion in private investment that has left Russia since Jan. 1, according to economist Neal Shearing of Capital Economics in London.
The Russian unit of German retailer Metro may scratch its planned London listing, as shares in Lenta, another Russian big-box chain, have slumped more than 17 percent since the stock’s Feb. 27 debut on the London exchange. The crisis also could derail some $8 billion in loans being sought by major Russian companies such as steelmaker Novolipetsk and mobile operator VimpelCom. “Until the situation stabilizes, there will be fewer international banks willing to lend in Russia,” Dmitry Dudkin of investment bank UralSib Capital in Moscow told Bloomberg News earlier this month.
At the same time, these companies’ stocks are getting hammered. Shares of Novolipetsk, controlled by one of Russia’s richest men, Vladimir Lisin, are down more than 34 percent this year. VimpelCom, controlled by billionaire Mikhail Fridman, has dropped 32 percent. According to the Bloomberg Billionaires Index, Russia’s 19 richest people have lost $18.3 billion since the Crimea incursion began on Feb. 28.
Businesspeople “are very scared,” Alexander Lebedev, who owns the Moscow-based investment group National Reserve, tells Bloomberg News. “There could be margin calls, reserves might be drawn down, exchange rates may fall, and prices will rise.”
And yet, business leaders have remained almost entirely silent, as the Kremlin in recent years has tightened government control of the economy. “The business community is freaking out—they’re terrified,” says Ben Aris, the editor and publisher of Business New Europe in Moscow, an online journal covering business and finance in the former Soviet bloc.
Ordinary Russians also would be hurt by capital flight. If the outflow continues at its current pace, it will total $70 billion during the first quarter, some 3.2 percent of gross domestic product. “There is a real risk that this could push Russia into recession this year,” says Capital Economics’ Shearing. Adding to the pain, the ruble has plunged 22 percent over the past year—a blow to shoppers in a country where imported goods account for more than 40 percent of consumption.
Despite its oil, gas, and mineral riches, Russia has suffered for years from a dearth of private investment that could diversify its economy and cushion it against commodity-price fluctuations. Consumer-facing companies such as Detsky Mir, Lenta, and VimpelCom looked set to help remedy that problem. Instead, Russia now will suffer an “absolute decrease” in private investment, says Bernie Sucher, an American entrepreneur and investor who has worked in Moscow for more than 20 years. “This is going to be an enduring setback for the economy,” he predicts.
Some in Putin’s inner circle seem to think the government can step up public investment to compensate for the loss of private capital. But, Sucher says, that approach is doomed to fail. Russia has already lost ground on competitiveness as the Kremlin has played an increasing role in the economy, he says. “The state, no matter how rich it is, cannot make up for the quality, efficiency, and competitiveness of private capital.”